With remote and hybrid work models becoming the new normal, more and more businesses are deciding to look outside of the traditional recruitment market and hire international employees to fill open positions. While there are many benefits to working with a global employee — enhanced creativity, multilingual customer support, and access to a global talent pool to name a few — many organizations lack the necessary experience to navigate the challenges that come with hiring internationally, such as complying with local labor laws and creating attractive benefits packages for new team members.
However, in many cases, the problem begins long before that. In fact, many businesses don't even know how to deal with this. The first question that usually arises is whether it is necessary to establish a legal entity and, if not, what other ways to hire employees abroad. Especially for small and medium-sized enterprises and start-ups that don't have the same funding as large international companies, it makes a big difference not having to set up a foreign entity every time they want to hire people abroad.
In this blog post, we'll show you three different ways to hire workers abroad that don't require registration, and discuss the advantages of each and the challenges that each poses.
For businesses that want to hire employees abroad, the first option is to work with international freelancers and contractors. Freelancers and independent contractors are an increasingly important talent resource for businesses. For example, Upwork's estimates suggest that in 2020, 36% of the U.S. workforce was freelance, representing no less than 1$2 trillion.
Freelancers and contractors fall under the category of independent workers, which means they do not have employee status. As a result, businesses can hire freelancers and contractors from almost any country in the world without setting up a legal entity, as the latter pay their own taxes and social security contributions and are not counted in the business's monthly payroll.
Working with freelancers and contractors from different countries around the world has many advantages for organizations, including:
Lower costs than employees: Because freelancers and contractors pay their own insurance, reduce their own taxes, and are not entitled to benefits or bonuses, hiring independent workers is often cheaper than hiring full-time employees.
Less administrative work: In addition to the financial benefits, working with independent contractors means less administrative work for the business. No benefits administration, no payroll processing, no taxes.
Increased flexibility and access to specialized skills: Independent contractors can participate in fixed projects or ongoing needs-based collaboration. This means that businesses have a high degree of flexibility as freelancers are available on demand and can do the exact amount of work required. Additionally, freelancers often have specialized skills and qualifications that may be required for a particular project, but that doesn't justify hiring a full-time person.
Although there are many benefits to working with temporary workers, there are also some drawbacks to working with freelancers and contractors. These include:
Employee misclassification risk: Employee misclassification occurs when a worker is hired by a business as an independent contractor, even though he or she should be properly classified as an employee, for example because he or she works almost exclusively for the business, has regular working hours, and receives certain benefits and work equipment. Misclassifying employees can have serious consequences for businesses. Because the classification rules for employees and contractors vary from country to country, organizations that work with contractors around the world face a high risk of non-compliance.
Permanent establishment risk: Many organizations ignore this, and depending on the business activity, hiring freelancers and contractors abroad on a permanent basis can trigger a permanent establishment – especially if it turns out that they are actually qualified as employees. A permanent establishment (PE) is when the business is considered to have a continuing presence in a foreign country that is not officially registered. Being classified as a permanent establishment by local authorities can trigger tax liability, penalties, and other adverse consequences for the business.
Expensive cross-border payments: Another challenge of working with international freelancers is paying invoices. In most cases, independent contractors stationed abroad want to pay in their local currency, which means high conversion fees, coupled with the sometimes astronomical transaction fees that banks charge on international wire transfers. As an alternative, companies can turn to payment options such as digital wallets, which allow them to pay international contractors in a number of different currencies with low fees.
Direct employment is when an international organization hires an employee of one of its own entities in a foreign country, without the need to create a new legal entity in the jurisdiction where the future employee will be located. In other words, instead of the hassle of setting up a local subsidiary, office, or branch office to act as a legal employer, a foreign business uses an existing (foreign) entity and then registers with the local authorities as a foreign employer.
Let's look at the example below. A French translation agency is looking for a Finnish French translator to work for them full-time. If they find a suitable candidate in Finland, they can hire a Finnish translator as a remote employee under their French entity, as Finland does not require businesses to establish a legal entity in order to hire people locally.
When properly managed, hiring employees in a new market that is directly led by their entity can provide multiple benefits to an organization. Here are some examples.
Possibility of hiring multiple employees: Once you've completed all the necessary registration procedures as a foreign employer, it's relatively easy to hire more employees in your respective jurisdiction.
Let talent work exclusively for you: The problem with contractors and freelancers is that they never work exclusively for one business because they assign their abilities to multiple clients. However, hiring international employees allows you to recruit full-time talent for your business without any concessions.
No additional costs: Direct employment means no need to go through the lengthy and expensive process of setting up a legal entity and no fees to pay to third-party service providers. This makes direct employment a very cost-effective option for hiring employees abroad.
Although direct employment is a legal solution for hiring international employees in various countries, companies should be prepared to deal with some administrative difficulties if they decide to use this method. These challenges include:
Permanent establishment: Similar to working with local freelancers and contractors, having an employee work for you abroad may leave you liable for corporate income tax in that jurisdiction. In many cases, the risk is even higher than that of freelancers or contractors, as employment is often seen by authorities as a higher level of commitment to their respective markets.
Comply with local employment laws: Even if your organization doesn't have a legal presence locally, employees are still hired under the laws of their jurisdiction. As the legal employer of your employees, you must follow all local labor laws and regulations to stay compliant.
Manage local payroll, taxes, and benefits: Foreign employers must meet the same obligations as local employers when it comes to wages, taxes, and employee benefits. This means learning how to handle payroll according to local standards and liaising with local tax and social security authorities to ensure that income tax and social security contributions on employment income are paid accurately and on time – unless the foreign business decides to outsource payroll to a local payroll service provider.
The third way to hire international employees (without having to set up a legal entity around the world) is to use a third party, which can be an Employer of Record (EOR), a Professional Employer Organization (PEO), or a Global Employment Organization (GEO). EOR, PEO, and GEO are three different global employment solutions that allow businesses to hire overseas employees compliantly without establishing a legal presence.
The EOR hires local employees on behalf of the foreign client business, thereby managing all administrative and compliance-related aspects of employment, including payroll, employment contracts, payments, and more. The organization that contracts EOR services is also responsible for managing the staff who work specifically for it. An EOR typically has a legal entity in one or more countries where services are provided, while service providers that spread across the globe are often referred to as Global Employment Organizations (GEOs).
However, there are some significant differences between EOR and PEO, namely that PEO plays the role of a co-employer and is primarily responsible for HR-related tasks, while EOR actually acts as the legal employer of the employee.
Using an external service provider such as EOR allows organizations to safely test new markets without having to make a large upfront investment to establish a legal entity, simplifying global expansion. But they also offer a variety of other advantages to businesses, including:
Compliance assurance: local labor laws, payroll regulations, tax rules, ......There are many compliance pitfalls that organizations need to be aware of when hiring internationally. Because compliance mistakes can be quite costly, having a service provider that can ensure full compliance at every level means peace of mind.
Convenient payment options: Paying employee wages and salaries is often included with the Employer of Record's services, which means that organizations that sign an EOR don't have to worry about paying their international employees.
Local expertise: Having an experienced local partner who is familiar with employment laws, payroll rules, and more is a big advantage when hiring employees overseas.
Everything is taken care of: Another major advantage of hiring employees abroad through a third party is that you don't have to deal with administrative or HR tasks. From payroll to benefits administration to employee registration, the Employer of Record handles everything related to administration, HR, and compliance, giving your business the freedom to focus on integrating new employees into its global team.
Global hiring solutions like EOR and PEO are arguably the best and easiest option for companies seeking to build a global team when it comes to compliance and service levels. However, utilizing such a solution is not without its challenges.
Choosing the right service provider: The rise of remote work has also led to an exponential growth in service providers offering solutions for hiring international employees. In a sea of available providers and solutions, choosing a global employment solution for your business can be difficult.
Pay an additional service fee: Like any other service you sign up for your business, EORS and PEOs don't offer services for free. For each employee hired through an EOR, PEO, or GEO, you'll pay a monthly fee, which is in addition to the employee's salary and bonuses. But while it's true that these additional costs can be avoided by businesses by opting for direct hire, most organizations will find that the price to pay for peace of mind is adequate when it comes to compliance.
There is only one service provider per country: many PEOs and EORS have limited country coverage to one country or a handful of countries, so if you want to hire talent in multiple countries, you'll have to hire multiple providers. As a result, the number of service providers that offer truly global coverage is quite limited.